Divorce, Money & Taxes
By: Jack W. Abel
Managing Partner, Abel & Zocolo Co., L.P.A.
If marriage is a partnership, divorce is a business arrangement. Emotions and feelings aside, divorce is money; money saved and money spent. Although occasionally forgotten, a primary consideration in any divorce should be the preservation of assets. Accordingly, a divorce, at least from the economic standpoint, should be conducted and handled as you would a critical business decision. Consider this, apart from you, your spouse and your children, another party interested in your divorce is the IRS. Tread carefully, for poor divorce planning may well cost you more than you think. Good planning may, however, actually yield significant income tax benefits.
Although you and your spouse may be anxious to have your divorce concluded, keep in mind that proper timing could possibly save you a lot of dollars. For example, if your divorce was finalized on December 30th, you and your former spouse may not file a joint return for that year and depending upon the relative incomes of you and your spouse, foregoing the joint return could cost you a bundle. If your divorce appears to be winding down near the end of the year, both joint and individual tax returns should be prepared and compared. If there is a benefit in filing a joint return, simply postpone finalizing the divorce until after the first of the year. Such timing can easily be accomplished by the preparation of a Separation Agreement which establishes the respective rights of the parties. Thereafter, at the appropriate time your divorce could be filed and your marital status preserved throughout that particular tax year. Similarly, if individual returns work better, work to conclude your divorce before the new year begins.
A second consideration in the structuring of a divorce is the possibility of altering tax liabilities between spouses by the use of spousal support (alimony). Although alimony may be the most despised word in the language of divorce, substantial tax benefits may result and should be fully investigated. Alimony payments are tax deductable to the payor, therefore reducing that person’s ultimate tax liability. Concurrently, alimony received will be taxable to the recipient. Nonetheless, if the respective income levels of the parties are disproportionate, the tax savings from the alimony deduction may significantly outweigh the associated tax burden – the result being more “after-tax” dollars to be divided between the parties.
In discussing matters of alimony and tax savings, matters concerning child support payments and the allocation of the income tax dependency exemptions must also be considered. Unlike alimony, child support payments do not qualify for any favorable income tax treatment. For such reason, it occasionally may be advisable to minimize child support and to maximize alimony. Similarly, it is not always true that the spouse with the larger income should claim the children as dependents and often, this can actually result in a higher overall tax liability. As a general rule, the parties may agree as to which of them shall be entitled to take the children as dependents on their income tax return and this is a matter that should be fully considered in negotiating your divorce. Although specific income levels and other tax planning matters must be considered, the shifting of the child dependency from one spouse to the other may well result in additional tax savings that can be shared between the parties.
It goes without saying that divorce is highly charged with emotion. It also goes without saying that whether you are a millionaire or are barely scrapping by that there are significant financial consequences that must be weighed as you proceed with your divorce. When, however, a divorce can be handled by the parties in a business context, substantial savings, primarily in the area of income taxes, may be realized.
Jack W. Abel is the former chairman of the Family Law Section of the Cleveland Bar Association. He is a mentor for the Ohio Supreme Court Mentoring Project, a former Guardian ad Litem for the Court and focuses on all family law matters including divorce, custody, juvenile and paternity matters.
This article is intended for educational purposes only. It is not to be construed as legal advice. Contact a licensed attorney for legal advice.